How do I have to understand the damage/canceling?

For my understanding I apply the damage and afterwards, if the hero still lives, I cancel it (and raise my threat). Or can he swallow an undefended big attack - bigger than his health pool?

If its the bold one how was that with archery damage? Do I apply one archery damage at a time?

You can use it to prevent damage larger than his health. Frodo's ability should be understood as something like "Response: If Frodo Baggins would take X damage, raise your threat by X instead". Cancellation/replacement effects in this game all work in that sort of way.

For archery damage specifically you have to assign the archery damage all together before applying it, so you can't assign more archery to Frodo than his remaining health.

At least he can swallow two archery without dying then. 😁

Thanks.